Every now and then you see one of those news stories that make you shake your head and say…

What???

CNN ran an all too common story today about a family who is, sadly, about to lose their $800,000 home due to foreclosure (see video below).

Such stories are becoming commonplace and subsequently losing their newsworthy appeal, but a “small detail” stood out in this story that seemed to be quickly passed over.

This “small detail” that stood out like a jalapeno pepper in my Cheerios is that one of the co-owners of this $800,000 home is actually a school bus driver (the second family member’s profession was not disclosed).

Living Beyond Your Means

Maybe I’m wrong, but I was under the impression that anyone who drives a big yellow bus full of screaming kids is a few pay grades below a cardiac surgeon that invested 10 to 15 years of their life learning a highly specific tradecraft or a successful small business owner who busted their hump for 15 hours a day after 10 years of hard work.

I say this from a tough love standpoint because when I think of homeowner who has an $800,000 mortgage, I generally think of someone (or a dual income family) that does very well for themselves by bringing home a home a sizeable six figure income. You know — someone who can actually afford to pay the mortgage and real estate taxes without having to rely on credit card debt to pay for everything else.

To be fair, CNN didn’t delve into the specifics of this couple’s finances, so it’s entirely possible that my hawkish criticism has led me down a path of unfounded speculation. Maybe the husband (who was not interviewed) had an excellent paying job and was recently laid off. Perhaps there were unforeseen medical expenses that took priority over the mortgage payment. Many things could have happened after they signed on the dotted line and put them on the foreclosure chopping block.

Regardless, as I sat incredulously watching this video I’m thinking… just what in the world were these people thinking?

Anyone who drives a bus can’t afford a $800,000 house! Right?

Scaled Up Consequences of One Bad Decision

We are beginning to see more and more reports of this sort of financially irresponsible behavior where an unknown percentage of the U.S. population bought entirely too much home than they could afford, and only now have they figured out that it was a huge mistake.

I can empathize with those who say “why shouldn’t we have nice things like everyone else?“. Then again, you could argue that this is the typical rationalization every 17 year old kid justified to himself before dealing drugs. He knew it was a risky decision, but he just wanted to have some of the finer things in life.

Just because you see everyone else making a bad decision, that isn’t the green light for you to make the same bad decision. This is where prudent judgment and sound financial planning should help you put on the brakes, assess the situation, and accurately gauge just how much home you can afford.

On a more macro scale, once you begin to multiply this family’s mistake a few million times over, you begin to see more dark clouds on the horizon for the U.S. economy. Hence the reason why the stock market is down ~50% from its highs.

Champagne Taste on a Beer Budget

My grandfather, who actually lived through the Great Depression, frequently used the idiom “don’t let your champagne taste ruin your beer budget”. As a kid, I couldn’t fully grasp the wisdom of this message but I practiced the message because it made sense. After all that has transpired, I give a little smirk when I watch the doom & gloom news reports because now, I fully understand what he was trying to convey.

So while mainstream media and the never ending stream of ridiculous TV shows (e.g. MTV Cribs) were hyping lavish lifestyles saying it was your God-Given, American right (not privilege!) to own a home, it was actually the equivalent of a carrot being dangled in front of a horse just to make him continue pulling the wagon.

The truth is that most of that message was complete bologna made to cloud your rational brain from asking if you could really afford it. That’s common knowledge to most everyone now, but it is important to highlight the distinction between what you want versus what you can afford before you make the decision to buy a big ticket item… like a $800,000 house!

So the next time you see that monstrosity of a home that you’re just dying to own, that $70,000 Escalade or maybe even a pricey bottle of bubbly when all you can afford is cheap domestic beer, maybe you’ll think twice before being suckered in and living beyond your means.

51 Comments

That’s a shame Obama’s housing plan hasn’t kicked in yet and wasn’t there for those poor victims. I’m really looking forward to paying for my neighbors houses that took on a mortgage comprising 50% of their income while we pinched pennies on a single income.

I don’t know the facts either, but just from a social circle standpoint, the people I know that have a husband making enough to afford an 800K house – the wife wouldn’t be caught dead driving a bus. It just doesn’t fit with the image.

I really miss those no income verification days; they were just swell. But hey, now the administration’s looking to reward the same dishonest loan officers that peddled Option ARMs and falsified income documents with “loan modification incentives”.

Looking forward to “spreading those mortgages around” – yeah!

(I’m actually a happy person; it’s tough to refrain during this ridiculous period)

Feb 23, 200911:47 pm

#2 Matt :

Yeah I’m with you on the smiley face factor these days. It’s tough to make a better argument than Rick Santelli’s rant about paying for your neighbors mortgage, so I’ll defer to him carry the message.

I don’t mind bailing out people who actually deserve a refi or to reset their principle balance, but not for someone like this who clearly exceeded their limitations and got caught up in the hype. Maybe if the husband lost his job and he was making 500k a year, but the pre-mortgage finances would have to justify buying that much home.

The next wave of foreclosures is supposedly coming from home with those short term ARMs with teaser rates, so once those rates reset, we could be in for more fun.

The entire lending field is corrupt and predatory—banks, credit card companies and student loan companies.

People who live beyond their means, signing mortgages for 800K cookie cutter McMansions are irresponsible. Mortgage companies picked them out of the herd like lonesharks prey upon compulsive gamblers. Both parties are responsible.

But what about student loan companies? 18-year-old kids take out loans for $100,000-$200,000 for an undergraduate degree and to land a job after graduation that annually nets $30,000-$35,000—if they’re lucky.

That seems equally predatory and irresponsible. At least you can declare bankruptcy with a mortgage. The government is trying to do something about the housing problem. What about people who are trapped under the weight of neverending student loan payments? Oftentimes, these people can barely pay the interest every month, the principle never goes down, and the payment plan stretches out 35 + years ahead.

How do universities and loan companies justify charging inflated tuition and granting loans to young adults for a BA in English lit? They claim they’re betting on their future earning potential. What they’re betting on is having indentured servants for their entire adult work life who are stuck in one of the most unforgiving, punitive loan schemes created.

I’m one of these people. Except, I took out crazy student loans for a doctorate in Psychology when I was 23, not considering what I was likely to earn, modest living expenses, and periods of unemployment as the Bush administration slashed dwindling mental health budgets.

I hate to think in terms of conspiracy, but it seems as if financial institutions and the government have created a class of wage slaves. I accept my responsibility for not doing due diligence when I signed my financial future away 14 years ago, but what about the people who gave out those loans? Oh right, they’re the ones who are being rewarded with billions of dollars in federal bailout money. So now, I’m still paying the interest on my student loans in addition to having my taxes cover other loan companies predatory lending practices. They basically get all my money, directly or indirectly.

I’m angry at myself for being a sucker for believing that an education would bring me financial freedom and mobility and that these companies are getting away with what should be criminal behavior.

Dr T

Feb 24, 20093:24 pm

#4 Matt :

I understand your anger. Both borrower and lender are at fault here, and past indiscretions generally rise to the surface in times like this.

As far as student loans go, I can’t necessarily fault the lender or borrower b/c it’s an investment for the future. Problem is, that education costs have outpaced inflation by 4 to 5 fold. Many universities realize that they can continually hike tuition costs since getting a college education is the “American thing to do” and they basically got you bent over pulling a Pulp Fiction routine.

The American system is currently set on a foundation of repaying debt, and just like a mortgage, your education costs are rolled into a monthly payment. Buy Now & Pay Later just seems to be commonplace and won’t likely disappear anytime soon.

It sucks that companies like GM and AIG get tax dollars, but you must consider we’re also getting a hefty interest payment from those loans. Several companies are trying to give the money back b/c it’s costing them a lot of money, and they’ve subsequently suspended dividends on their common equity. So it’s a damned if you do, damned if you don’t situation.

You’re are right on in your assessment. If your grandfather had been a banker he might also have said do not lend money to people who can not afford to pay it back, and make sure that the asset is worth what they are paying for it. You are too easy on the bankers. In my opinion the systemic failure was more the bankers fault than the individuals although they both share responsibility.

I see un-scrupulous car dealers pushing bad car loans on people who have no other choice. if the bank will buy the deal they do not care whether the deal fails or not as long as they make their money. The securitiztion process removes this free market check. If I write a bad deal and it fails I lose. If you create a securitization system where every deal that unwinds every person in the link has to give back the money, you would have far fewer failures. The system would then punish bad decisions and they would learn what works.

Feb 25, 20099:00 am

#6 Harry :

This is a blooming example of the Wizard of Oz mentality that slathered over of the minds of the public. They can still file bankruptcy? What a idiotic solution that is. Frankly, a second mortgage is a disgrace – it simply means you need money, and filing bankruptcy is also a disgrace-maybe it is again times ten. And if someone would please weight in if the loan is discharged like any loan or credit card amount isn’t tax owed on the amount as it is considered a gift? If the house loan is discharged and it is say 800K and the house sells for not even 400K isn’t he borrower liable for tax on the 400K difference?

Feb 25, 200911:42 am

#7 Bob :

I dont see why we keep rewarding these people who live beyond their means. Basically they forced people who could afford it to overpay by inflating the prices. Any program should be geared towards people who PAY their bills and are not already late.

Thanks for commenting. I agree, I didn’t criticize the bankers and their insatiable appetite once CDOs became a hot item. However, the primary message I was attempting to convey were the behaviors that can be controlled — the behavior of each individual person.

Theoretically, if everyone had the personal finance “common sense” that folks like us possess, we probably wouldn’t be in this situation. My grandfather was one of those that preached self reliance and responsibility, but I suppose those ideals are a luxury that requires too much work for a culture who thrives upon instant gratification.

The problem with the lending market is the loans are no longer held by the originator. Many of the banks that are thriving in this environment are those that wrote mortgage for prime borrowers, and still hold the mortgage. It’s an old school concept, but it’s certainly better than being leveraged 40x beyond your held capital and begging for semi nationalization.

Checkout my post on CDOs and you’ll see how mortgage brokers passed along those ticking time bombs called subprime mortgages.

Feb 25, 20091:13 pm

#10 Matt :

@ Harry,

I think some of the blame falls into a personal lack of responsibility and a desire to have the finer things in life no matter the cost. Around 75% of the U.S. population has some form of debt, so it’s just an accepted way of life. Until we can change the minds of the spenders, we won’t make a dent in changing popular opinion.

Then again, when you have America’s leaders (e.g. Bush) telling you to go out and spend after a national crisis while begging other countries to buy our national debt (Hillary), you have a serious problem. Attitude tends to reflect leadership.

I’m not sure what would happen to the homeowner if they’re underwater on their mortgage in this environment. Commonsense says they would owe more, but with write downs becoming commonplace on Wall Street, who really knows other than those who are changing the rules every 2 weeks due to political pressure.

Thanks for commenting.

Feb 25, 20091:19 pm

#11 Matt :

@ Bob,

Agreed. It was a typical feeding frenzy among investment bankers, but instead of a trading pit, the buying frenzy spilled over into Main Street.

Everyone got a taste of the “Good Life” and the more people saw it on TV, the more everyone rushed to take a bite of the American Dream. That’s how bubbles form. Problem is that the same real estate agents that said “this is a hot market and you must pay what the market is paying” are now out of work. Hopefully those that made that justification invested their money well because they won’t be making those kinds of profits anytime soon.

I’ll post some data in the future to show just how overbought the market really was at it’s apex.

If you’re going to smack down my grammar, at least do me the courtesy of spelling my error correctly.

Feb 25, 20091:27 pm

#13 David :

Living beyond their means! Doubt it. This is a case where numerous of folks got greedy and bought the most they could buy in an attempt to sell a couple of years later and make a killing. Obviously, they overlooked the risk.
Our government will bail them out.

Feb 25, 20091:34 pm

#14 Matt :

@ David,

That’s a distinct possibility they intended to flip the home. Southern Cali homes would be bought and sold in a 3 to 6 month time frame without being occupied.

You could argue this was the largest Ponzi scheme the world has ever seen.

Feb 25, 20094:38 pm

#15 LiChou :

I don’t want to pay for my neighbor’s mortgage under any circumstances. Let the free market place play itself out. If these people in this report cannot pay, then simply let the lender foreclose on their property and then sell it to someone who can afford to pay the mortgage, property taxes, insurance, HOA, etc.

Feb 25, 20095:17 pm

#16 Matt :

@ LiChou,

Agreed. The only scenario I could get behind would be a community based approach where neighborhood homeowners assume the mortgage or negotiate a short sale on the property. Perhaps a pooled relief fund if someone played by the rules, but lost their job due to a layoff.

At least this way, we can see what we’re actually paying for and it’s going for a good cause. If the locals disagree because the homeowner is a jerk and deserves it, or if the homeowner is analogous to the above example, then it proceeds into foreclosure.

Just trying to see both sides of the argument.

Feb 25, 20096:32 pm

#17 Glenn :

Matt,

First you state you agree with LiChou. Then you provide an example situation where you show where you would agree to pay for a neighbor’s mortgage, which proves you do NOT agree with LiChou’s point. This ‘community based’ approach you mention, which may sound more palatable, still contains the evil of socialism at its root.

To really ‘agree’ with LiChou’s point, then under NO circumstances would you agree to have your property confiscated for use by another. That is pure and simple theft.

Feb 25, 20097:11 pm

#18 A REAL American :

Just more unpatriotic negativity from liberals who hate America, Ronald Reagan, and the troops.

Feb 25, 20097:37 pm

#19 Matt :

@ Glenn,

I said “could” not would. Me helping out my neighbor in foreclosure may be socialism, but I could also argue that my motivation is purely capitalist because I don’t want their foreclosure destroying the value of my home.

I would just like to know what system we’re following so I can adjust my investments to match the rules of the game.

Yeah, I wonder how she’s able to afford that house. She should of bought a 300k-500k house not a 800k house.

I think that’s personally her fault. But also the lenders for fooling her into getting into it.

She was naive and got played by the lenders. ;)

Mar 2, 20092:44 pm

#22 Matt :

@ Paul

Agreed. It takes two to tango!

Mar 3, 20091:16 am

#23 thomas :

She’s an idiot. Her husband is an idiot. We can’t function as a society if we always bail out idiots.

Mar 5, 20092:13 pm

#24 Wendy :

If you listen to the video from CNN, it states that her husband is in the construction industry. She is a bus driver but he has a job in an industry that at one time was a profitable industry. It is very possible that at the time they bought their house, they were able to afford it. But given the state of his industry, are now facing trouble.

Mar 5, 20092:52 pm

#25 Matt :

@ Wendy,

Thanks for commenting. This CNN video didn’t disclose the husband’s employment status so it’s good to find another another location disclosing that information. Do you have the link to that video/article?

It’s at time frame 1:26. It says she and her husband and construction worker.

Mar 5, 20095:55 pm

#27 Matt :

Thanks Wendy. I plan on writing a follow up to this 2nd video this weekend. Unfortunately, the embedded video above didn’t disclose the husband’s employment status since your link is a Part II follow up segment to blogger’s reaction.

I also saw a few comments on other blogs saying her name was Arminta Garcia and she (and her husband) are real estate flippers. Not sure if that’s true or not, but it would certainly be some egg on CNN’s face if someone can confirm this as fact rather than speculation considering the tone of the first video.

Finding out her husband was a construction worker doesn’t make me change my original opinion that they lived beyond their means even when both of them were employed. The husband would need to make $100k to $200k per year to realistically have the ability to repay a mortgage like that unless they made a huge down payment.

Mar 5, 20096:26 pm

#28 RP :

We live in CA and although our combined gross income is around 200K, we didnt buy a house here since the home prices here, were and still are, outrageously expensive. We were prudent and did our part, but feel sad that irresponsible people like her are getting attention and being bailed out. We thought of every possible scenario – loss of job, schooling expenses, etc. How could anyone not think of all possible circumstances before buying an 800K home is beyond me.
I see people developing the mentality that they will just walk out or not pay the mortgage if they go underwater on the home value. Oh ya…we will let the lender worry about it.
Home prices still havent come down to levels that can be considered normal or cheap atleast in CA. And if the obama administration doesnt let that happen by preventing foreclosures, its just pushing out the inevitable.

Mar 5, 20099:13 pm

#29 JB :

I watched this report, and I remember her saying her husband was a construction worker.

Mar 5, 200910:14 pm

#30 Wendy :

Matt you are correct in that their combined income needed to be substantial. We don’t know what their situation was when they bought the house. My husband is in the construction industry and when we built our current house, he was making close to $100K (mid $90s). That was 2 years ago. Today, he is making $40K less and it hurts. Our house is no where near $800K, thank goodness. We didn’t buy above what we could afford then. It’s just this industry has taken a huge hit.

I know there are a lot of homeowners out there that bought more house than they should have. But there are some that were smart at the time they bought. It’s just things suck right now and those that you would never thought would have trouble are having trouble.

Mar 6, 200912:40 am

#31 Matt :

@ JB,

The video I included above was only Part I, and did not disclose the husband’s profession.

The video that came out today (3/5) was a Part II response to acknowledge the bloggers and negative remarks that peppered Mrs. Garcia’s Facebook page. I’m sure CNN didn’t mind running with a hot story a second time either.

@ Wendy

I certainly agree with you that times are tough — especially for the home building related industries and those that service them. But the saving grace in your situation is that you were smart, lived within your means, and you can continue to live in your home without needing any “unnatural” assistance to keep your home.

The scary side of the recession/depression scenario is that people who played by all the rules begin to lose their jobs, and later start defaulting on their mortgages. That is where things get tricky and some leniency could potentially be implemented.

I am hoping that the recent increase in the savings rate leads to a new generation of Americans thinking like your grandfather. My grandparents, too, lived through the Great Depression and I remember hearing the stories as a child. Unfortunately, the further away we got, the easier the lessons were to forget.

I hope that my kids will be able to learn from these recent events and live within their means.
.-= Kidgas´s last blog ..In the Top 1 Million!! =-.

Alas, the cost of hops has gone up so much the last few years, even a beer budget is beyond the means of many Americans. Especially if they drink good beer.

Feb 20, 20107:53 pm

#35 Barbara Saunders :

I agree with the general principle of living within one’s means. I have no house. I am also single and recently picked up and relocated temporarily for work. I have no pat judgment, though, about other people’s situations. I most recently lived in San Francisco. Realistically there are people there living “beyond their means” on more than six figures. Set aside the fantasies and one realizes that, even in San Francisco, there are a whole heckuva lot of people with good jobs who are just not ever going to earn 6-figures. What are they supposed to do?

“Move,” people chime in. But what do you do if you grew up there? Your sick mom is there? Your job is there, and you really can’t move it? Tenancy-in-common with friends may not be a good idea, but what’s the other option? Stretching to buy an overpriced home with no cushion may not be a good idea, but what’s the option? Rent? Ha! Rents are through the roof, also.

Many people make bad and irresponsible choices, to be sure. But I think there’s a bit of denial operating when we castigate people who literally had no option available that wasn’t “irresponsible.” People have to live, and most do the best they can.

Feb 20, 20107:58 pm

#36 Barbara Saunders :

The other issue, for me, is the self-righteousness. Do we really expect that 18-year-old kids have the financial savvy to understand this completely? People sometimes exercise bad judgments, no doubt about it. Great. But who does it help if things are set up such that a bad judgment made at EIGHTEEN YEARS OLD cannot be recovered for 30, 40, or 50 years?

Feb 20, 20108:02 pm

#37 Barbara Saunders :

Bankruptcy protection was one of the earliest features of the USA precisely because the colonists saw that debtors’ prisons and lifelong debt were, in balance, WORSE both for individuals and society as a whole than total and terminal ruin for a few true scoundrels, a greater number of fools, and a still larger number of honest people caught up in something beyond their control.

Feb 21, 201010:55 am

#38 Matt SF :

People have to live, and most do the best they can.

While I agree wholeheartedly with that statement, the folks involved in this video fancied themselves as real estate investors/speculators. They bought at the top, couldn’t afford the payments, lost a job because the husband worked in real estate/construction, etc.

So in my opinion, they fell victim to the get rich quick dream (or scheme) and didn’t want to pay the consequences.

May 12, 20108:06 pm

#39 Financial Bondage :

bus drivers don’t make that much money. how can they afford a home like that? Oh I guess they can’t its in foreclosure. Jeesh. What a story.

May 30, 20102:52 pm

#40 Seth :

He may have been a construction worker and also operate a construction company.

Like you may say that Ken Lewis is a banker who is also the CEO of Bank of America.

I assure you that some people in construction were easily earning more than the $200,000 annual income and probably had a 15 year track record of doing so by 2006. His wife probably had a real job because of the health insurance problem for the self employed.

FYI- construction is a high revenue, capital intensive, and low margin business, like airlines.
It doesn’t take much to sink these guys.

I know a lot of people that bought their house with a no verification mortgage and the majority are honest and hard working individuals and without a stated loan they very likely would not have been capable of buying. This kind of loan options in my opinion have their place, they just should be more tightly regulated and not coupled with zero down programs, but 10% to 20% or even more money down.

I can agree with most of that Josh. I don’t think all option ARMs or subprime loans are “evil” per se, just that deregulation of this entire area of the market was allowed to grow and metastasize far beyond what should have been allowed.

The most vocal critics claimed “it’s our right to own a home” or “we don’t want to live in a nanny state”, and yet, they’re either bankrupt, bailed out or shunned by financial media after the credit/real estate bubble burst.